Unisys cuts Q2 losses

Unisys Corporation (NYSE: UIS) today reported improved financial results in the second quarter of 2007 as the company continues to make progress in its multi-year repositioning program.

Highlights of the quarter include:

Strong double-digit growth in services orders

Significantly improved operating profit margins in both the services and technology businesses

Strong improvement in operating cash flow

As expected, the company took a net $24 million pre-tax restructuring charge in the quarter related to facility consolidations and workforce reductions. Including this charge and a $40.6 million tax expense, the company reported a second-quarter 2007 net loss of $65.5 million, or 19 cents per share. These results compared with a second-quarter 2006 net loss of $194.6 million, or 57 cents per share, which included a net pre-tax restructuring charge of $141 million and a tax benefit of $8.9 million. Pre-tax retirement-related expense in the second quarter of 2007 was $24.5 million compared with $45.2 million a year ago. The company reported an operating profit of $2.5 million in the current quarter compared with a $183.7 million operating loss in the year-ago quarter.

Revenue for the second quarter of 2007 declined 2 percent to $1.38 billion from $1.41 billion in the year-ago quarter, principally driven by a decline in the company's systems integration and consulting business. Foreign currency exchange rates had an approximately 3 percentage-point positive impact on revenue in the quarter.

"As we focus on transforming our profitability, we also continue to build our sales pipeline and lay the foundatation for future revenue growth," McGrath said. "Our services orders showed strong double-digit growth in the quarter, reflecting good client interest in our strategic growth programs. The order growth was broad-based across most service lines and geographies. We were particularly encouraged by strong order growth in systems integration and consulting."

Major wins in the second quarter included:

A significant contract from the Federal Reserve Bank of Cleveland, acting on behalf of the 12 U.S. Federal Reserve Banks, for Unisys to design and help implement a leading-edge electronic check image processing exchange system based on open source technology

A five-year framework contract awarded to a Unisys-led consortium by the European Commission's Taxation and Customs Union Directorate-General (DG TAXUD), under which DG TAXUD can order up to EUR72 million (approximately US$100 million) in IT operations and support services from the consortium; about 39 percent of the order value is expected to come to Unisys

A four-year contract extension, valued at an estimated $108 million, of the Los Angeles Eligibility, Automated Determination, Evaluation and Reporting (LEADER) program, under which Unisys supports public assistance programs for the LA Department of Public Social Services

A six-year contract extension, valued at about $72 million, under which Unisys will provide a range of expanded IT outsourcing services to the City of Chicago; Unisys has been providing outsourcing services to the city since 1999.

A contract from the U.S. Department of Defense for Unisys to continue developing and maintaining a leading-edge system, using radio frequency identification technology, to track shipments of military supplies worldwide. The contract term has one base year, worth approximately $28 million if the government continues to order time and materials work at the current level, and could be worth approximately $112 million if the government exercises three one-year options and continues to order time and materials work at the current level.

Second-Quarter Company Results

The company reported strong double-digit growth in its services orders in the second quarter. Order gains were broad-based with growth across all services segments with the exception of core maintenance, which is in secular decline. Unisys reported substantial order gains in systems integration and consulting.

Revenue in the United States declined 7 percent in the quarter to $591 million while revenue in international markets increased 2 percent to $785 million.

Both U.S. and international orders showed double-digit gains in the quarter.

The company's gross profit margin and operating profit margin in the second quarter of 2007 improved to 21.8 percent and 0.2 percent, respectively, including the restructuring charge. These compared with gross and operating profit margins of 11.6 percent and (13.1) percent, respectively, in the second quarter of 2006, including the year-ago restructuring charge.

Second-Quarter Business Segment Results

Unisys has a long-standing policy to evaluate business segment performance on operating income exclusive of restructuring charges and unusual and non-recurring items. Therefore, the comparisons below exclude the second-quarter 2007 and 2006 charges discussed above.

Customer revenue in the company's services segment declined 1 percent in the second quarter of 2007 compared with the year-ago period. The company reported continued revenue growth in outsourcing, which was offset by revenue declines in systems integration and consulting and in core maintenance. Gross profit margin in the services business improved to 17.3 percent compared with 14.3 percent a year ago. Services operating margin improved to 2.5 percent compared with (0.9) percent a year ago, a $42 million year-over-year improvement.

Customer revenue in the company's technology segment declined 9 percent from the second quarter of 2006. Gross profit margin in the technology business improved to 43.3 percent from 37.6 percent a year ago while operating margin improved to (0.6) percent compared to (12.2) percent a year ago.

Cost-Reduction Program

As part of its ongoing cost reduction efforts, Unisys took a net $24 million charge in the quarter related to facility consolidations and approximately 550 workforce reductions, primarily in the United States. During the quarter the company consolidated certain of its global facilities to reflect its recent headcount reductions and its continued move to an increasingly mobile services delivery workforce.

During the second quarter Unisys completed approximately 550 personnel reductions related to current and previously announced headcount actions. Overall since announcing its repositioning effort at the end of 2005, the company has announced approximately 7,100 headcount reductions, of which about 80 percent are now complete.

As it streamlines its operations, Unisys continues to invest in its strategic growth programs and in global sourcing. Net of these reinvestments, the company expects its announced 2006 and first-half 2007 cost restructuring actions to yield, on a run-rate basis, annualized cost savings of more than $340 million by the second half of 2007 and more than $365 million by the first half of 2008.

Cash Flow and Balance Sheet Highlights

Unisys generated $23 million of cash from operations in the second quarter of 2007. In the year-ago quarter, the company used $193 million of cash from operations. The company used approximately $37 million of cash in the second quarter of 2007 for restructuring payments compared to approximately $34 million in the year-ago period.

Capital expenditures in the second quarter of 2007 increased to $84 million compared to $65 million in the year-ago quarter due to increased investments in outsourcing assets related to new outsourcing engagements. After deducting for capital expenditures, Unisys used $61 million of free cash in the quarter compared with free cash usage of $258 million in the second quarter of 2006.

During the second quarter, the company received approximately $58 million in cash related to a previously announced income tax audit settlement in the Netherlands. The company ended the quarter with $521 million of cash on hand.